DEAR BENNY: I would appreciate it if you would comment on the procedures for bidding on houses that are up for foreclosure. I suspect that one could get a decent deal, but I can’t seem to crack the code on how to go about purchasing a house at a foreclosure auction. I realize that I have to show up with a cashier’s check for the specified amount and make up the balance within 30 days, so I presume that I have to have all my anticipated financing in order. –R.B.
DEAR R.B.: I will answer each of your questions separately.
1. How do I get access to preview the house, get it inspected, and let my financier’s appraiser in the house before the day of the auction?
Answer: Talk with the lender (or the attorney) who is foreclosing. Also talk with the current owner whose house is up for foreclosure. If you are not able to get access, I would be very reluctant to go forward. Regardless of how good a deal you may get at the foreclosure sale, you don’t know the condition of the house. Many homeowners who are about to lose their house will strip it of everything valuable — fixtures, appliances, etc.
2. How do I go about checking out any tax or mechanic liens on the property?
Answer: Many local jurisdictions have Web sites that will provide you with the tax information. But you should immediately retain an attorney to assist you. The lawyer can obtain a title search to make sure that there are no hidden issues that would preclude you from getting good title to the property.
3. Finally, is this a reasonable way to go to try to buy a personal residence property? I am looking for a condo. The condo prices have risen so high that I thought I could find something reasonable at foreclosure.
Answer: Buying any property at a foreclosure sale is risky. First, at the last minute the delinquent homeowner can file for bankruptcy relief, which would put a stop to the sale. Second, as discussed above, you must know the condition of the property. And third — and perhaps most important since you are considering buying a condominium — make sure that you carefully review the financial situation and the legal documents of that condo association. Are there other units that are delinquent or facing foreclosure?
It is risky, so be very careful.
DEAR BENNY: My daughter and I own a house as joint tenants. It is our principal residence and we file our taxes separately. We plan to sell the house. Are we eligible for up to $500,000 in capital gains exclusions? –Elizabeth
DEAR ELIZABETH: If you and your daughter have owned and lived in the house for two out of the five years before it is sold, you are both entitled to take advantage of the capital gain exclusion. However, since you both file a separate tax return, you and your daughter can each exclude only up to $250,000 of any gain that you make.
DEAR BENNY: How does a “short sale” affect your credit? What is the difference between that and a foreclosure? What are the benefits of a short sale? –Vanessa
DEAR VANESSA: When a house is foreclosed, there is an auction (usually either in the offices of an independent auction company or on the steps of a local courthouse) and if no third party is the successful bidder, the bank that forecloses will take title. This will definitely impact on your credit standing.
In a short sale, the lender agrees to allow the house to be sold for a price below the amount of the mortgage, and the bank will either forgive the balance of the mortgage debt or ask the homeowner to pay some or all of the difference between the sales price and the then-outstanding balance.
I do not believe there is a standard policy on how short sales affect one’s credit. I suggest that you contact your lender to determine its policy.
As I understand it, not all lenders will report the short sale to the credit-reporting companies. If they do not do this, then you may be able to purchase another property — at a lower price and definitely with a lower mortgage that you can afford.
DEAR BENNY: My question is in regards to short sales and foreclosures. Other than losing a principal residence when a lender forecloses (or allows a short sale to take place), are there other consequences? Can a lender place a lien on other properties owned by the same person for the uncollected balance? –Joaquin
DEAR JOAQUIN: You would have to check with an attorney in the state where your property is located. In some states, a lender can look to the borrower for what is known as the “deficiency,” and even ask a court to grant a judgment for the difference between what the property is sold for at the foreclosure sale and the amount of the loan balance just before the sale took place. Once a lender gets a judgment, that is (or can be) a lien against other properties owned by the borrower.
In a short sale, however, the terms and conditions are spelled out before the sale takes place. The borrower may be required to pay all (or part) of any deficiency, and if the borrower has other properties, the lender may insist on putting a lien on one or more of them.
But in general, there are three ways in which a lien can be placed on your property: (1) it is consensual — i.e., both borrower and lender agree to the lien, such as a mortgage or a deed of trust; (2) it is obtained through a court order; or (3) it is imposed by laws enacted by a government — such as an IRS lien or a lien for nonpayment of local taxes.
There is some good news, however. For years, the tax code has been a major problem facing homeowners who arrange with their mortgage lender to forgive a portion of their debt. To add insult to injury, the law required those taxpayers to pay income tax (called “phantom income”) on the money they did not have to pay their lender.
Congress finally got its act together and on Dec. 20, 2007, President Bush signed into law a temporary change to the tax code. For the period Jan. 1, 2007 through Dec. 31, 2009, homeowners will not have to pay tax on any debt that is cancelled.
The law does not protect speculators or investors. It applies only to principal residences — situations where the taxpayer has owned and lived in the house for two or more years. And only the original loan can be cancelled debt free; if you have a second deed of trust (mortgage), the “phantom income” tax will still apply.
DEAR BENNY: My husband and I own our house, but I am getting a refinance loan that will be in my name only. I will still have my husband on the deed of trust with me. However, if I were to pass away can the bank take the house from my husband or force him to sell? We are going to get life insurance on both of us large enough to pay off the house. What do you think? –Teri
DEAR TERI: There are many concepts in real estate that differ from state to state, so you should consult with a lawyer who has a real estate practice.
When a borrower gets a mortgage loan, the lender will require that the borrower sign (in addition to a promissory note) either a mortgage document or a deed of trust. Although there are some states where mortgages are still used, the majority of lenders throughout the country use a deed of trust.
You buy your house and get a deed to the property. That deed is recorded among the land records where your property is located. Then you sign a deed of trust, which is also recorded. (When you refinance, you will also have to sign a deed of trust.) That document deeds your property in trust to a trustee (or trustees) selected by the lender. If you pay off the loan, the trustees will release the deed of trust from land records; if you become delinquent, the trust document gives the trustees the legal right to sell your property at a foreclosure sale.
If you and your husband both own the house, and only one of the owners signs the deed of trust, then the trustees do not have full title and thus cannot foreclose. That is why your husband will also be required to sign the deed of trust.
The answer to your question may be found in the promissory note or the deed of trust that you will be signing. Many loan documents specifically state that the loan will become due on the death of the borrower.
But back in the 1980s, Congress enacted a law prohibiting most lenders from calling the loan under certain circumstances, one of which was when the property is transferred by operation of law on the death of a joint tenant or tenancy by the entirety. I assume from your question that you and your husband own the property together in one of these two ways. If that’s the case, then on your death, title to the entire house will — by operation of law — automatically be in his name.
So, while the lender may be able to sue your estate for the outstanding mortgage, they will not be able to take the house away from your husband, assuming of course that he continues to pay the mortgage. And since you will have insurance to cover that situation, your husband will be protected.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.